“The characteristic feature of the market price is that it equalizes supply and demand. The size of the demand coincides with the size of supply not only in the imaginary construction of the evenly rotating economy. The notion of the plain state of rest as developed by the elementary theory of prices is a faithful description of what comes to pass in the market at every instant. Any deviation of a market price from the height at which supply and demand are equal is – in the unhampered market – self-liquidating.” (Mises 2008: 756–757).This is a strident statement, and not just limited to Mises’s entirely fictitious evenly rotating economy (ERE), for Mises invokes the “plain state of rest,” a temporary state in which all desired transactions are completed and no further trades are conducted (e.g., the end of a trading day in the stock market).
For Mises, the “unhampered market” would produce prices caused by the dynamics of supply and demand curves, and deviations would lead to self-liquidation and market-clearing prices.
Yet even this vision is little more than ideological fantasy. Even in undergraduate economic classes, students will usually learn that the law of demand cannot really be universal, for Veblen goods and Giffen goods (perhaps often perceived as anomalies) already rule out an absolutely universal law of demand. And, even if government “distortions” could be eliminated, what about businesses that engage in price setting/price administration?
Prices set by businesses are not equilibrium prices. As Lee says, “administered prices are not market-clearing prices and nor do they vary with each change in sales (or shift in the virtually non-existent market or enterprises ‘demand curve’)” (Lee 1994: 320, n. 18).
Matters are different when we turn from Mises to Ludwig Lachmann, who did indeed understand the existence of fixprice markets. First, an anecdote Bruce Caldwell tells about Lachmann is quite instructive:
“I first met Ludwig M. Lachmann on February 4, 1982 at the first spring semester meeting of the Colloquium in Austrian Economics at New York University. ….Secondly, Lachmann’s own judgement on the usefulness of equilibrium prices:
During that first meeting I had an exchange with Mario Rizzo about the concept of market-clearing. I argued that though the speed of adjustment problem was an empirical issue, it was not something that could be tested as a general proposition. I drew the implication that one’s view of the rapidity of clearing was a matter of faith, nothing more than a metaphysical assumption, though obviously a crucial one. Lachmann nodded his head vigorously as I was finishing up, which pleased me immensely.” (Caldwell 1991: 140).
“Those who glibly speak of ‘market clearing prices’ tend to forget that over wide areas of modern markets it is not with this purpose in mind that prices are set. They seem unaware of the important insights into the process of price formation, an Austrian responsibility, of which they deprive themselves by clinging to a level of abstraction so high that on it most of what matters in the real world vanishes from sight.” (Lachmann 1986: 134).This is yet another divergence between Lachmann’s brand of Austrian theory and the other branches of Austrian economics.
Caldwell, Bruce J. 1991. “Ludwig M. Lachmann: A Reminiscence,” Critical Review 5.1: 139–144.
Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford.
Lee, F. S. 1994. “From Post Keynesian to Historical Price Theory, Part 1: Facts, Theory and Empirically Grounded Pricing Model,” Review of Political Economy 6.3: 303–336.
Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala.